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December 2015 Update - Review to September 2015

Asset allocation quarterly review

The latest Towers Watson review of the economic assumptions underlying our platform optimised portfolios sees revised asset allocations this quarter.

Platform asset allocations

All major markets and asset classes enjoyed positive returns for the first quarter of 2015, with the exception of commodities which continued to suffer from a weakening oil price and soft metal pricing. There were a number of stimuluses’ across markets including Japan and European Quantitative Easing plans stimulating both equity and fixed interest markets. Low inflation figures, fuelled by falling energy costs, postponed expectations of rate rises and fed through into improving economic activity in areas such as the euro zone.  Fixed interest markets have proved very volatile, rising in value on low inflation data and central bank action to stimulate economies by buying in debt, but falling back when investor focus turns to the low historic yields, or data suggesting inflation may pick up later in the year.
Given the above positive gains in all major markets in early 2015, the Towers Watson forecast expectations for future returns have in general decreased over the quarter, with risk measurement (volatility) either static or marginally declining. 
The outcome from the model, has been at many risk levels, no change in asset allocation or very minor alterations, with the exception of cash and Fixed interest assets.  As stated last quarter over the last year there has been a steady reduction in fixed interest yields and to a lesser extent, a reduction in long-term projected cash yields. This has led to a gradual, but sustained movement away from UK fixed interest holdings in favour of increased cash holdings across the majority of the risk profiles.
With the continued fluctuations in fixed interest markets and considering the cost to clients of switching the most appropriate action is to maintain the current fixed interest allocations. Therefore the overall asset allocations this quarter remains unchanged.

Asset allocations for the portfolios have changed very little for the most part, however where changes have occurred these have included: 

  • a small movement out of cash mostly favouring UK fixed interest. This is most notable at Risk Levels 3 to 5 with changes of between 2% to 5%. The movement is due to a reduction in Towers Watson’s return assumptions for both cash and UK fixed interest over the quarter. Corporate bond reductions have been moderated by the small expansion of credit spreads, from investors demanding a higher return for holding corporate bonds relative to UK Government bonds.
  • slight alterations to equity allocations for most risk levels, with a small movement from UK to international equities due to minor changes in the forecasted returns and volatilities for the different geographic regions.
  • a reduction in exposure to property for ISA, CRA and offshore bond portfolios for Risk Levels 6 and 7 (by between 3% to 4%) and Risk Level 1 (by 1%) due to reduced projected returns this quarter.

View the current platform allocations.

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